Federal Prompt Pay Act Does Not Afford Subcontractors Right to Sue General ContractorOn October 15, 2020, in EMTA Insaat Taahhut ve Ticaret A.S. v. Cosmopolitan Incorporated, a federal district court held that the federal Prompt Pay Act (PPA) (31 U.S.C. §§ 3901, et al.) does not create a private right of action for a subcontractor against a general contractor.  The dispute arose from a project for the installation of hardened trailer systems at the U.S. consulate in Turkey. The subcontractor alleged that the general contractor failed to make payments, including interest penalties required by the PPA, under the parties’ subcontract.

The subcontractor sued the general contractor for breach of contract and breach of the PPA.  The general contractor moved to dismiss the breach of the PPA claim arguing that the PPA did not provide the subcontractor with a private right of action. Opposing the motion, the subcontractor contended that, because the subcontract incorporated the terms of the prime contract and the prime contract was governed by the PPA, the subcontract was also governed by the PPA. The subcontractor, therefore, alleged that the right to collect interest was a matter of contract — not statute. The federal district court rejected the subcontractor’s argument and granted the motion to dismiss. The court found that “courts have repeatedly rejected the argument that the PPA contains either an explicit or implied private cause of action in favor of subcontractors” and that neither the statutory text nor the legislative history supported the subcontractor’s argument.

The result in EMTA underscores the importance of understanding the rights and remedies available for contractors and subcontractors on federal projects. Here, if the subcontractor had rested solely on the PPA to support is lawsuit, it may have been left with no recourse against the general contractor for nonpayment. In other contexts, understanding federal law may be even more important for preserving a subcontractor’s rights. For example, subcontractors must comply with Miller Act requirements to preserve bond rights on federal projects. If a subcontractor encounters an insolvent general contractor, those bond rights may be the only security the subcontractor has available for nonpayment or other claims.

If you have any questions about subcontractor rights and remedies under the PPA or about government contracts generally, please do not hesitate to reach out to Doug Patin or Aman Kahlon.

The Impact of the 2020 Tennessee Construction LegislationAfter a number of controversial bills proposed from various industry groups over the last few years, the Tennessee construction community came together in 2020 to push through legislation intended to protect members of the construction industry. A cornerstone of that attempt was gaining lien priority – or at least parity – with construction lenders, further bolstering the trust fund statutes, and developing statutory stop work procedures in the event of non-payment. As with most legislation, there were a few changes made along the way that were necessary to pass the bill into law. Those changes eliminated some of the proposed protections – including lien parity or priority – and created some unintended wrinkles.

The new amendments arguably apply to most, if not all, ongoing projects. Specifically, they apply to any contract (or subsequent change order) executed after July 1, 2020 (“applies to actions occurring and contracts entered into, amended, or renewed on or after that date”). A practical summary of changes is shown below.

Prompt Payment Act:

  1. Retainage – The Tennessee Retainage Act already provides protections and incentives to protect the construction community. Thus, with two notable exceptions, no real changes were made. Those exceptions were:

a. Public entities are no longer subject to any penalties for failing to comply with Tennessee retainage requirements. It is unclear whether a public entity is still obligated to comply with the obligations and establish an interest-bearing escrow account to hold the project retainage or practically if they will do so. While the amendment releases the public entities from retainage act penalties, it does not expressly release all the other participants on a public project who may still be subject to the statutory requirements for any retainage being withheld and the potential $300 per day penalty. While time will tell how a court will interpret the revision, any contractor holding retainage on a public project should verify the creation of a compliant account at the owner level and obtain written confirmation from the public entity. Absent confirmation, a contractor should strongly consider independently creating a compliant interest-bearing escrow account to hold any retainage.

b. Language was added to protect escrow agents holding the retainage to make it easier to create proper retainage escrow accounts: “Relief may not be sought against the person holding the retainage as the escrow agent, and that person bears no liability for the nonpayment of the retainage.” The statute still provides authority for the court to order the person holding the retainage to pay it into trust.

  1. Trust Fund Enhancements – The Tennessee statutes already require funds received or committed for construction projects to be held in trust. The new amendment makes clear that neither insolvency nor bankruptcy excuse a failure to comply with the requirements.
  2. Demand for Reasonable Assurances – Another paramount concern of the construction industry efforts was to address projects that lose funding or have funding issues after the execution of the contract or commencement of the project. Thus, a statutory requirement has been added upon the demand by a prime or remote contractor for an owner to provide “reasonable evidence” within 10 days that it has adequate funding for the project. In addition, the owner is prohibited from “materially vary[ing]” the financial arrangement without notifying the entity that previously requested the assurance. The amendment also adds a statutorily approved form for the demand for reasonable assurance (see TCA 66-34-603(a)(5)). Notably, there is not a statutory remedy if the owner fails to provide adequate assurance, but a court may consider the owner’s failure as an anticipatory breach.
  3. Right to Stop Work Procedure – While the enhancement of the trust fund statutes and lien priority protection did not make the final bill, a clear procedure on the right to stop work did. The language in the new amendment for the right to stop work is built around the question of whether the party withholding payment provides “adequate legal reasons.” Thus, the new “right” is really a formalized procedure rather than a new right. Contractors must understand that courts will likely still require a contractor to prove a material breach before stopping work – if the nonpaying party responds to the notice with some excuse that could be considered “adequate legal reasons.” Thus, the new procedure gives a contractor a clear right to stop work in certain situations, but contractors must remember it is not an absolute right. Instead, stopping work can have grave consequences for the project and expose a contractor to significant liability, so any decision to stop work should still be approached with significant caution.
  4. Increased Interest – To give the Prompt Payment Act some real teeth, interest has been increased to 1.5% per month.
  5. New User-Friendly Demand Form – One of the concerns that was continually expressed was the need for a simple demand form when payment was overdue, without the need for counsel or proceeding with a Notice of Nonpayment or Notice of Lien under the lien statutes. As a result, there is now a statutory form (see 66-34-602(a)(5)).

Lien Laws/Truth in Construction Act:

  1. Pre-work Lien Notice: Commercial Project – This was technically required under the old law on all commercial projects pursuant to the Truth in Construction Act. However, it did not have any real teeth, so it was universally ignored by the construction community. Practically, a lack of notice has not been a real issue on commercial projects, particularly with the notice of nonpayment requirements for remote contractors that exists under the lien law. Thus, the new amendment eliminates the pre-work lien notice for commercial projects.
  2. Pre-work Lien Notice: Residential Project – The area where issues and confusion appeared to exist was in the residential markets where there were less sophisticated owners. Thus, the new amendment now requires a prime contractor to provide notice to the owner on a residential project and provide the form for doing so (see 66-11-203).
  3. Lien Waivers – Pre-work contractual lien waivers were already unenforceable under Tennessee law. Now, with the amendment, a party that continually attempts to use them is subject to the jurisdiction and disciplinary action from the licensing board and exposes itself to payment of attorneys’ fees.
  4. Final Lien Waiver – The form of the final lien waiver that is required from the prime contractor under the Truth in Construction Act has been modified (see 66-11-205). While the failure is a class B misdemeanor, failure to provide the waiver continues to have very minor consequences.

Time Limitations

  1. Statute of Repose – The statutes generally remain the same with the four-year (with the potential extension to a fifth) statute of repose ending all legal actions relating to construction either four or five years after substantial completion. The problem was that there was confusion as to whether the statute of repose applied in arbitrations, with at least one arbitral tribunal allowing a plaintiff to proceed on an older claim because it did not believe the statute of repose applied beyond the court room. The amendment makes clear that the statutes of limitation and repose are to apply in arbitration as well. Similar tweaks were made throughout the construction-related statutes to clarify the intent even further.
  2. Statute of Limitations – While most construction-related actions are limited by the statute of repose, there are some claims that can expire sooner based on a variety of statutes of limitation. Notably, after some discussion, similar amendments were not made to the various statutes of limitation to clarify whether or not those statutes of limitation are intended to apply to arbitrations.

ICC Releases New International Arbitration Rules – Important Changes for the Construction and Energy SectorThe International Chamber of Commerce (ICC) International Court of Arbitration, one of the leading international arbitral institutions, has released revised Rules of Arbitration to take effect in January 2021. The 2021 ICC Rules contain some important updates, especially for the construction and energy sector, which constitutes approximately 40% of the ICC’s overall caseload. The 2021 ICC Rules also make adjustments for international arbitration in the era of COVID-19, providing accommodations that could make international arbitration more efficient and economical in the long term.

Key Changes

  • Consolidation and Joinder: The 2021 ICC Rules expand the provisions of joinder and consolidation making it easier to join additional parties and consolidate multiple matters. These changes may prove important for construction and energy disputes, which often involve multiple cross border parties and contracts.
    • Joinder: Under the 2017 ICC Rules, all parties had to consent to the joining of an additional party after appointment of the tribunal. The 2021 ICC Rules include a new Article 7(5) allowing the tribunal to join third parties if those parties consent and agree to the Terms of Reference. The tribunal will consider “all relevant circumstances” when weighing the joinder of additional parties.
    • Consolidation: The 2021 ICC Rules attempt to clarify some previous ambiguity and broaden the rules for consolidation of disputes. Previously, Article 10 stipulated that disputes arising from multiple agreements could only be consolidated if they involved the same parties. The 2021 ICC Rules provide more flexibility and broaden consolidation options. This revision will be helpful in construction and energy sector disputes as it will allow consolidation of claims arising under multiple contracts, such as prime and subcontracts. However, parties should be careful in drafting these agreements to ensure that all contracts contain the same arbitration clauses consenting to ICC arbitration pursuant to the ICC Rules.
  • Virtual Hearings and Electronic Filings: The 2021 ICC Rules take into account the drastically different professional landscape brought on by COVID-19. These amendments will not only be useful as parties navigate the impacts of the pandemic, but they open the door to a more efficient and economical arbitral process in the post-COVID-19 world. The most significant change is found in Article 26(1), which now allows for virtual hearings, subject to the tribunal’s decision “after consulting with the parties, and on the basis of relevant facts and circumstances.” The option for virtual hearings, which one can only assume will outlast the virus, may provide a more economical option for parties willing to forgo an in-person hearing. It is also likely to be a more efficient process as scheduling will be made easier without the need to coordinate travel to the hearing locale.

The revised ICC Rules also specifically allow for electronic submission of pleadings and written communications (see Articles 3(1), 4(4)(b), and 5(3)).

  • Award Enforcement and Due Process: The ICC has taken the opportunity to set forth several amendments that are aimed at strengthening the enforceability of arbitration awards by warding off due process concerns. While these amendments may increase the enforceability of awards, parties should be aware of some of the increased powers granted to arbitral tribunals.
    • Article 11(7) requires all parties to disclose any non-party entities or individuals who are funding a party’s claims or defenses. While this new clause seeks to promote transparency and ward off potential conflicts of interest, it may place new disclosure requirements on parties regarding information they would typically keep confidential.
    • Article 12(9) allows the ICC to appoint the entire arbitral tribunal “in exceptional circumstances . . . to avoid a significant risk of unequal treatment and unfairness that may affect the validity of the award.” Such exceptional circumstances may be found where the arbitration agreement contains one-sided provisions for party appointment of arbitrators and thus provides another motivation to draft arbitration agreements carefully and thoughtfully.
    • Article 17 has been wholly reworked to grant greater authority to the tribunal in dealing with potential conflicts of interest arising from the parties’ representatives. Section 2 allows the tribunal to “take any measure necessary to avoid a conflict of interest” in regards to party representatives, including exclusion of any representative with a conflict of interest from participating in the proceedings. This is a fairly significant change to tribunal authority in an area that was historically left to counsel to disclose and handle accordingly.
    • Article 36(3) clarifies that the tribunal may issue “additional awards” for claims it “omitted to decide” in the original award but were presented during the hearing upon request from a party and approval by the Secretariat. This clarification should be welcome as it provides parties a clear process by which to ensure consideration of all claims, even when the tribunal initially declines to address them.
  • Fast Track Arbitration: The revised ICC Rules amend Appendix VI, Article 1(2) to increase the amount in controversy for Expedited Procedure (Article 30) from $2 million to $3 million. This change should also be welcome. The fast track arbitration option provides a more efficient and expedient arbitral process for smaller claims, and the amount in controversy should increase to match the reality of the global economy and cross border contracting. Parties can and should expect to see this amount continue to increase with subsequent amendments to the ICC Rules.

The 2021 ICC Rules serve to modernize ICC procedure to meet the practical needs of key industries, ensure arbitral enforceability, and accommodate the significant changes brought on by COVID-19. Parties frequently adopting the ICC Rules, especially those in the construction and energy sector, will be well served to take these changes into account when drafting arbitration agreements in cross-border contracting.